Jonathan Portes and Anand Menon set out how the UK could be left behind by a rethinking of trade by the global powers.
For many Conservative Brexiters, the UK’s exit from the European Union provided an opportunity to reassert itself as a buccaneering global trading nation. Outside the protectionist constraints of the customs union, so the argument went, the UK would not only be able to reduce trade barriers with third countries, but would become the champion of a liberal international trading order.
Speaking in Greenwich in February 2020, Boris Johnson spoke of Britain’s desire to go “out into the world . . . re-emerging after decades of hibernation as a campaigner for global free trade.”
And in an unmistakable Johnsonian flourish, he underlined how the UK intended to play a leading role in defending and strengthening the liberal international economic order: “Humanity needs some government somewhere that is willing at least to make the case powerfully for freedom of exchange, some country ready to take off its Clark Kent spectacles and leap into the phone booth and emerge with its cloak flowing as the supercharged champion, of the right of the populations of the earth to buy and sell freely among each other.”
Even at that time, an enthusiastic embrace of global free trade, albeit abetted by Superman, was not going to compensate for the economic impact of leaving the European Union. Now, however, a combination of trade tensions and geopolitics have conspired to shift the international economic landscape and undermine this vision still further.
Underpinned by US economic and political hegemony, the post-1945 era saw first the progressive liberalisation of trade and capital flows and then the incorporation of China into the global economy. Even the 2008-09 global financial crisis did not spawn any significant reversion to protectionism. Within America, there was a broad consensus that this broadly liberal and internationalist system was consistent with its own enlightened self-interest, even given periodic short-term domestic political costs.
However, geopolitical factors – Covid-19, the war in Ukraine, and above all growing tensions with China – are rapidly reshaping the international and domestic economic policies of the major powers, beginning with the US. The Inflation Reduction Act (IRA) comprises $369 billion worth of tax credits and subsidies designed to stimulate green technology and electric vehicle industries in the United States. The Chips and Science Act provides similar incentives to semiconductor firms to set up manufacturing facilities in the United States while banning outsourcing to China and other “countries of concern”.
Nor are these just isolated pieces of legislation. In a strikingly frank and far-reaching recent speech, the US national security adviser Jake Sullivan outlined plans for a radically different approach to international trade, emphasising both the prioritisation of domestic investment and the linkage between international trade and security.
Unsurprisingly, the European Union has responded. The European Chips Act is intended to make the bloc more self-sufficient and will include “priority order” mechanisms to ensure there are EU-made chips for EU countries during shortages. The EU is also rolling out its Global Gateway initiative, with €300 billion for ‘boosting smart, clean and secure links in digital, energy and transport and strengthen health, education and research systems across the world.’ Negotiations are underway for a Green Industrial Plan in response to the IRA initiative.
Where does this leave us? First, it suggests that the market for a further push towards global or multilateral trade liberalisation is limited at best. That does not mean that we cannot conclude trade deals with like-minded ‘free traders’ such as Australia, but the economic impact will be at best marginal. Nor does it mean that we will be locked out of the US or EU markets. Rather, any improvement on our current arrangements will be dictated not by a general presumption that trade liberalisation is automatically beneficial, but by US and EU views of what is in both their economic and, crucially, security interests.
Added to this, outside of the EU, our leverage will be limited at best. Sullivan’s speech did not even mention the UK, giving rise to a certain degree of panic in Whitehall and Westminster. Meanwhile, the discussion with the EU on local content rules for electric vehicles is providing an interesting test case. It may well be in the EU’s own interest to extend the grace period, without which trade in electric vehicle across the Channel – in both directions – would become considerably more problematic. But it is far from clear whether such arrangements will remain viable once the EU has its own battery capacity.
Furthermore, the UK risks getting caught in the middle of any further deterioration of international economic relations. A leaked internal government analysis suggests our economy would suffer more than those of the US, EU and China in the event of a full-blown subsidies war. While the basis for this analysis is unclear, the logic – that ‘as a mid-sized economy outside the major trading blocs’ we would be most exposed – is clear.
In addition, just as we would be most exposed to new trade barriers, we may be less well placed to respond. Nor is this simply a problem for the present government. In a recent Washington speech, Rachel Reeves echoed Sullivan’s language, talking about ‘Securonomics”’ But the UK lacks the fiscal capacity of the world’s economic superpowers, and will consequently struggle to struggle to develop national capacities in areas such as chips or electric batteries. One obvious way to address this would be, as Labour is also proposing, to develop closer economic relations with the European Union while remaining outside both the single market and the customs union. Yet it remains an open question, given the emphasis being placed on the development of domestic capacity in strategic sectors, as to whether Brussels will have an interest in boosting trade links.
In a more benign international environment, it might have been more credible for Britain to serve, if not as the lynchpin, at least as a key node in an increasingly interconnected world. But, in addition to its other economic and political contradictions, Brexit seems to have been remarkably badly timed.
This piece was originally published in Times Red Box on 8 June 2023. The original can be found here.